Twitter Counters Elon Musk’s Takeover Bid With a Poison Pill

Twitter unveiled its counterattack against Elon Musk on Friday, using a strategy invented to repel corporate raiders in an attempt to block a takeover bid by the world’s richest person.

The strategy, known as a poison pill, would flood the market with new shares if Mr. Musk, or any other individual or group working together, bought 15 percent or more of Twitter’s shares. That would immediately reduce Mr. Musk’s stake and make it significantly more difficult to buy up a sizable portion of the company. Mr. Musk currently owns more than 9 percent of the company’s stock.

The goal is to force anyone trying to acquire the company to negotiate directly with the board. Investors rarely try to break through a poison pill threshold, according to securities experts — one said “it would be financially ruinous, even for him.” But Mr. Musk rarely abides by precedent.

Twitter said the mechanism would not stop the company from holding talks about a sale with any potential buyer and would give it more time to negotiate a deal that offers a sufficient premium.

The pill “does not mean that the company is going to be independent forever,” said Drew Pascarella, a senior lecturer of finance at Cornell University. “It just means that they can effectively fend off Elon.”

Mr. Musk, who is worth more than $250 billion and is the chief executive of Tesla and SpaceX, announced his intention to acquire the social media service on Thursday, making public an unsolicited bid worth more than $40 billion. In an interview later that day, he took issue with Twitter’s moderation policies, calling Twitter the “de facto town square” and saying that “it’s really important that people have the reality and the perception that they are able to speak freely within the bounds of the law.”

He also said he had a Plan B if the board rejected his offer, though he did not share it.

Analysts have said that Mr. Musk’s bid — which offers significantly more per share than the current stock price but is well below its peak last year — may undervalue the company. They have also raised concerns about Mr. Musk’s ability to cobble together financing. If the board negotiated a deal with Mr. Musk, it could include a breakup fee, which would make Mr. Musk pay a sizable penalty if the deal falls apart. That might assuage concerns about his volatile nature getting in the way of closing a deal, some securities experts said.

Twitter attempted to wrangle Mr. Musk in recent weeks as he snapped up its shares. Last week, Twitter offered Mr. Musk a board seat, but he soured on the arrangement when it became clear that he would no longer be able to freely criticize the company. He rejected the role on Saturday and informed Twitter on Wednesday evening of his acquisition plans.

Twitter said in a statement that its poison pill plan, which will remain in effect until April of next year, “is similar to other plans adopted by publicly held companies in comparable circumstances.” The company’s board, which includes Jack Dorsey, a co-founder of Twitter who is friendly with Mr. Musk, voted unanimously to approve the plan.

Mr. Musk still has other options, like challenging the poison pill in court. That would be unlikely to be successful, said Edward Rock, a professor of corporate governance at the New York University School of Law.

“The first question will be: Does this bid pose a threat to Twitter and shareholders? And there are lots and lots of arguments they can make that it does pose a threat,” Mr. Rock said. There are doubts about how serious Mr. Musk’s bid is, given the scant details about its financing. And Mr. Musk has already raised red flags with public statements and his filings pertaining to the offer.

Companies are often wary of using poison pills because they do not want to be seen as unfriendly to shareholders. Even so, some critics of the practice, like the influential advisory group Institutional Shareholder Services, have indicated that they are open to the tactic in certain circumstances.

Twitter’s other top shareholders, according to FactSet, include the investment giant Vanguard Group, the largest, with more than 10 percent; Morgan Stanley Investment Management, with 8 percent; and BlackRock Fund Advisors, with about 4.5 percent.

Ark Investment Management, led by Cathie Wood, a star of the Reddit investing community who has previously bet on Mr. Musk, has about 2 percent, as does Mr. Dorsey.

Mr. Musk seemed to be girding for a protracted fight. When he notified the board of his bid on Wednesday, he said it was his “best and final offer” and that he would “reconsider my position as a shareholder” if it was rejected. But in an interview at a TED conference on Thursday he acknowledged that he does not like to lose. And later in the day, he took to his favored social media platform: “Taking Twitter private at $54.20 should be up to shareholders, not the board,” he tweeted, alongside a Yes/No poll.

Mr. Musk’s bare-bones offer left open significant questions. Mr. Musk has hired Morgan Stanley to advise on the bid, although the investment bank is not known for financing large-scale deals on its own. And Twitter shareholders seemed wary: Twitter’s stock fell almost 2 percent on Thursday, closing at $45.08 — significantly below Mr. Musk’s offer. Stock markets in the U.S. were closed Friday for the Good Friday holiday.

Mr. Musk argued that taking Twitter private would allow more free speech to flow on the platform. “My strong intuitive sense is that having a public platform that is maximally trusted and broadly inclusive is extremely important to the future of civilization,” he said during the TED interview.

He also insisted that the algorithm Twitter uses to rank its content, deciding what hundreds of millions of users see on the service every day, should be public for users to audit.

Mr. Musk’s concerns are shared by many executives at Twitter, who have also pressed for more transparency about its algorithms. The company has published internal research about bias in its algorithms and funded an effort to create an open, transparent standard for social media services.

But Twitter balked at Mr. Musk’s hardball tactics. After a Thursday morning board meeting, the company began exploring options to block Mr. Musk, including the poison pill and the possibility of courting another buyer.

During an all-hands meeting on Thursday, Twitter’s chief executive, Parag Agrawal, sought to reassure employees about the potential shake-up. Although he declined to share details about the board’s plans, he encouraged employees to stay focused and not allow themselves to be distracted by Mr. Musk.

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